National Savings and Investments has announced that the amount that savers can invest in premium bonds has increased from £40,000 to £50,000. With more than £61million in prizes paid out each month are premium bonds good value for money?
Are premium bonds worth it?
Premium bonds are an example of great marketing. They appear very simple to understand and most people just see them as a perpetual lottery with a chance of winning £1million.
The problem is that it’s a lottery you are never likely to win. Winners are picked at random from the 50 billion bonds in existence. That means that you have a 26billion to one chance on winning the top prize each month (of which there are 2)
To put that into context you are 1,900 times more likely to scoop the lottery jackpot (which will also likely be higher than £1million) than winning the top prize in the premium bonds draw.
Or in other words you’d need to put £1,900 into premium bonds to get the same chance of winning the top prize as you have of winning the lottery jackpot. But even if you take account of all the prizes that premium bond holders can win (and the the odds of doing so) the average annual return is just 1.35% tax free.
But that’s the average figure, and what you’d get if you held all 50 billion premium bonds in existence and won every prize. The reality is that no one will achieve that consistently. Of course some lucky people might but the odds are stacked against you.
The attraction of premium bonds is that they are backed by Government and the returns are tax-free. Yet you can get a better rate on cash ISA’s at the moment (which are tax-free) and that are also backed by the Financial Services Compensation Scheme (FSCS). Here is a roundup of the current best cash ISA rates at the moment.
Of course if you are using the maximum £50,000 premium bonds allowance your odds of winning are greatly increased. If they are also held for a number of years you are more likely to win a number of prizes and match the returns achievable from a savings account.
So are premium bonds a good investment?
From experience the people most interested in premium bonds are wealthy top rate tax payers. I’m talking about those who’ve maxed out pension contributions, ISA allowances and for whom the tax they pay on savings accounts is punitive. The very people who are trying to minimize their tax bill and don’t need an income (remember premium bonds don’t pay income). For these people 1.35% seems a good deal as they’d need to get over 2.45% from an ordinary savings account before tax to beat it.
For everyone else premium bonds offer pretty poor value, unless of course you simply like a flutter or buy them as a gift for grandchildren.
A better alternative to premium bonds?
But here’s an idea if you are simply fixated on winning a jackpot...
Remember that £1,900 mentioned earlier? If you put it in a savings account you can comfortably earn enough monthly interest to buy monthly lottery tickets and have some money left over. To achieve this a basic rate tax payer would only need to find a savings account offering around 1.6% per annum gross, of which there are plenty!
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